Publications

Public Policy Brief Highlights

In this new policy brief, President Dimitri B. Papadimitriou and Research Scholar Greg Hannsgen evaluate the current path of fiscal deficits in the United States in the context of government debt and further spending, economic recovery, and unemployment. They are adamant that there is no justification for the belief that cutting spending or raising taxes by any amount will reduce the federal deficit, let alone permit solid growth. The worst fears about recent stimulative policies and rapid money-supply growth are proving to be incorrect once again. In the authors’ view, we must find the will to reinvigorate government and to maintain Keynesian macro stimulus in the face of ideological opposition and widespread mistrust of government.

Without Major Restructuring, the Eurozone is Doomed

Critics argue that the current crisis has exposed the profligacy of the Greek government and its citizens, who are stubbornly fighting proposed social spending cuts and refusing to live within their means. Yet Greece has one of the lowest per capita incomes in the European Union (EU), and its social safety net is modest compared to the rest of Europe. Since implementing its austerity program in January, it has reduced its budget deficit by 40 percent, largely through spending cuts. But slower growth is causing revenues to come in below targets, and fuel-tax increases have contributed to growing inflation. As the larger troubled economies like Spain and Italy also adopt austerity measures, the entire continent could find government revenues collapsing.

No rescue plan can address the central problem: that countries with very different economies are yoked to the same currency. Lacking a sovereign currency and unable to devalue their way out of trouble, they are left with few viable options—and voters in Germany and France will soon tire of paying the bill. A more far-reaching solution is needed.

The global abatement of the inflationary climate of the past three decades, combined with continuing financial instability, helped to promote the worldwide holding of US dollar reserves as a cushion against financial instability outside the United States, with the result that, for the United States itself, this was a period of remarkable price stability and reasonably stable economic expansion.

For the most part, the economics profession viewed these events as a story of central bank credibility, fiscal probity, and accelerating technological change coupled with changing demands on the labor market, creating a model of self-stabilizing free markets and hands-off policy makers motivated by doing the right thing—what Senior Scholar James K. Galbraith calls “the grand illusion of the Great Moderation.” A dissenting line of criticism focused on the stagnation of real wages, the growth of deficits in trade and the current account, and the search for new markets. This view implied that a crisis would occur, but that it would result from a rejection of US financial hegemony and a crash of the dollar, with the euro and the European Union (EU) the ostensible beneficiaries.

A third line of argument was articulated by two figures with substantially different perspectives on the Keynesian tradition: Wynne Godley and Hyman P. Minsky. Galbraith discusses the approaches of these Levy distinguished scholars, including Godley’s correlation of government surpluses and private debt accumulation and Minsky’s financial stability hypothesis, as well as their influence on the responses of the larger economic community.

Galbraith himself argues the fundamental illusion of viewing the US economy through the free-market prism of deregulation, privatization, and a benevolent government operating mainly through monetary stabilization. The real sources of American economic power, he says, lie with those who manage and control the public-private sectors—especially the public institutions in those sectors—and who often have a political agenda in hand. Galbraith calls this the predator state: a state that is not intent upon restructuring the rules in any idealistic way but upon using the existing institutions as a device for political patronage on a grand scale. And it is closely aligned with deregulation.

Why We Should Stop Worrying About U.S. Government Deficits

This brief by Yeva Nersisyan and Senior Scholar L. Randall Wray argues that deficits do not burden future generations with debt, nor do they crowd out private spending. The authors base their conclusions on the premise that a sovereign nation with its own currency cannot become insolvent, and that government financing is unlike that of a household or firm. Moreover, they observe that automatic stabilizers, not government bailouts and the stimulus package, have prevented the US economic contraction from devolving into another Great Depression. The authors dispense with unsubstantiated concerns about deficits and debts, noting that they mask the real issue: the unwillingness of deficit hawks to allow government to work for the good of the people.

More Care Less Insurance

The United States has the most expensive health care system in the world, yet its system produces inferior outcomes relative to those in other countries. This brief examines the health care reform debate and argues that the basic structure of the health care system is unlikely to change, because “reform” measures actually promote the status quo. The authors believe that the fundamental problem facing the US health care system is the unhealthy lifestyle of many Americans. They prefer to see a reduced role for private insurers and an increased role for government funding, along with greater public discussion of environmental and lifestyle factors. A Medicare buy-in (“public option”) for people under 65 would provide more cost control (by competing with private insurance), help to solve the problem of treatment denial based on preexisting conditions, expand the risk pool of patients, and enhance the global competitiveness of US corporations—thus bringing the US health care system closer to the “ideal” low-cost, universal (single-payer) insurance plan.

Toward an Alternative Public Policy to Support Retirement

Pension funds have taken a big hit during the current financial crisis, with losses in the trillions of dollars. In addition, both private and public pensions are experiencing significant funding shortfalls, as is the government-run Pension Benefit Guaranty Corporation, which insures the defined-benefit pension plans of private American companies. Yeva Nersisyan and Senior Scholar L. Randall Wray argue that the employment-based pension system is highly problematic, since the strategy for managing pension funds leads to excessive cost and risk in an effort to achieve above-average returns. The average fund manager, however, will only achieve the risk-free return. The authors therefore advocate expanding Social Security and encouraging private and public pensions to invest only in safe (risk-free) Treasury bonds—which, on average, will beat the net returns on risky assets.

In his State of the Union address President Obama acknowledged that “our most urgent task is job creation”—that a move toward full employment will lay the foundation for long-term economic growth and ensure that the federal government creates the necessary conditions for businesses to expand and hire more workers. According to a new study by Levy scholars Rania Antonopoulos, Kijong Kim, Thomas Masterson, and Ajit Zacharias, the government needs to identify and invest in projects that have the potential for massive, and immediate, public job creation. They conclude that social sector investment, such as early childhood education and home-based care, would generate twice as many jobs as infrastructure spending and nearly 1.5 times the number created by investment in green energy, while catering to the most vulnerable segments of the workforce.

The purpose of the 1933 Banking Act—aka Glass-Steagall—was to prevent the exposure of commercial banks to the risks of investment banking and to ensure stability of the financial system. A proposed solution to the current financial crisis is to return to the basic tenets of this New Deal legislation.

Senior Scholar Jan Kregel provides an in-depth account of the Act, including the premises leading up to its adoption, its influence on the design of the financial system, and the subsequent collapse of the Act’s restrictions on securities trading (deregulation). He concludes that a return to the Act’s simple structure and strict segregation between (regulated) commercial and (unregulated) investment banking is unwarranted in light of ongoing questions about the commercial banks’ ability to compete with other financial institutions. Moreover, fundamental reform—the conflicting relationship between state and national charters and regulation—was bypassed by the Act.

Social unrest across Europe is growing as Euroland’s economy collapses faster than the United States’, the result of falling exports and a weaker fiscal response. The controversial title of this brief is based on a belief that the nature of the euro itself limits Euroland’s fiscal policy space. The nations that have adopted the euro face “market-imposed” fiscal constraints on borrowing because they are not sovereign countries. Research Associate Stephanie A. Kelton and Senior Scholar L. Randall Wray foresee a real danger that these nations will be unable to prevent an accelerating slide toward depression that will threaten the existence of the European Union.

<p>The Obama administration has implemented several policies to &ldquo;jump-start&rdquo; the American economy&mdash;efforts that have largely focused on preserving the financial interests of major banks. The authors of this new policy brief believe that maintaining the status quo is not the solution, since it overlooks the debt problems of households and nonfinancial businesses&mdash;and re-creating the financial conditions that led to disaster will simply set the stage for a recurrence of the Great Depression or a Japanese-style &ldquo;lost decade.&rdquo; They recommend a more radical policy agenda, such as federal spending programs that directly provide jobs and sustain employment, thereby helping to restore the creditworthiness of borrowers, the profitability of firms, and the fiscal position of state and federal budgets.</p>

A wave of revisionist work claims that “anticompetitive” New Deal legislation such as the National Industrial Recovery Act (NIRA) and the National Labor Relations Act (NLRA) greatly slowed the recovery from the Depression; in this new public policy brief, President Dimitri B. Papadimitriou and Research Scholar Greg Hannsgen review these claims in light of current policy debates and cast into doubt the argument that NIRA and NLRA significantly prolonged or worsened the Depression. Moreover, Social Security, federal deposit insurance, and other New Deal programs helped usher in an era of relative prosperity following World War II. When it comes to combating the current recession and employment slump, it is the successful experience with relief and public works, and not the repercussions of pro-union and regulatory legislation, that offer the most relevant and helpful lessons.

A group of experts associated with Economists for Peace and Security and the Initiative for Rethinking the Economy met recently in Paris to discuss financial and monetary issues; their viewpoints, summarized here by Senior Scholar James K. Galbraith, are largely at odds with the global political and economic establishment.

Despite noting some success in averting a catastrophic collapse of liquidity and a decline in output, the Paris group was pessimistic that there would be sustained economic recovery and a return of high employment. There was general consensus that the precrisis financial system should not be restored, that reviving the financial sector first was not the way to revive the economy, and that governments should not pursue exit strategies that permit a return to the status quo. Rather, the crisis exposes the need for profound reform to meet a range of physical and social objectives.

Is the B Really Justified?

The term BRIC was first coined by Goldman Sachs and refers to the fast-growing developing economies of Brazil, Russia, India, and China–a class of middle-income emerging market economies of relatively large size that are capable of self-sustained expansion. Their combined economies could exceed the combined economies of today’s richest countries by 2050. However, there are concerns about how the current financial crisis will affect the BRICs, and Goldman has questioned whether Brazil should remain within this group.

Senior Scholar Jan Kregel reviews the implications of the global crisis for developing countries, based on the factors driving global trade. He concludes that there is unlikely to be a return to the extremely positive conditions underlying the recent sharp increase in growth and external accounts. The key for developing countries is to transform from export-led to domestic demand-led growth, says Kregel. From this viewpoint, Brazil seems much better placed than the other BRIC countries.

Lessons Learned from South Africa’s Expanded Public Works Programme

Beyond loss of income, joblessness is associated with greater poverty, marginalization, and social exclusion; the current global crisis is clearly not helping. In this new Public Policy Brief, Research Scholar Rania Antonopoulos explores the impact of both joblessness and employment expansion on poverty, paying particular attention to the gender aspects of poverty and poverty-reducing public employment schemes targeting poor women.

The author presents the results of a Levy Institute study that examines the macroeconomic consequences of scaling up South Africa’s Expanded Public Works Programme by adding to it a new sector for social service delivery in health and education. She notes that gaps in such services for households that cannot afford to pay for them are mostly filled by long hours of invisible, unpaid work performed by women and children. Her proposed employment creation program addresses several policy objectives: income and job generation, provisioning of communities’ unmet needs, skill enhancement for a new cadre of workers, and promotion of gender equality by addressing the overtaxed time of women.

The Federal Reserve’s response to the current financial crisis has been praised because it introduced a zero interest rate policy more rapidly than the Bank of Japan (during the Japanese crisis of the 1990s) and embraced massive “quantitative easing.” However, despite vast capital injections, the banking system is not lending in support of the private sector.

Senior Scholar Jan Kregel compares the current situation with the Great Depression, and finds an absence of New Deal measures and institutions in the current rescue packages. The lessons of the Great Depression suggest that any successful policy requires fundamental structural reform, an understanding of how the financial system failed, and the introduction of a new financial structure (in a short space of time) that is designed to correct these failures. The current crisis could have been avoided if increased household consumption had been financed through wage increases, says Kregel, and if financial institutions had used their earnings to augment bank capital rather than bonuses.

Policy Advice for President Obama

In the current global financial crisis, economists and policymakers have reembraced Big Government as a means of preventing the reoccurrence of a debt-deflation depression. The danger, however, is that policy may not downsize finance and replace money manager capitalism. According to Senior Scholar L. Randall Wray, we need a permanently larger fiscal presence, with more public services. His advice to President Obama is to discard all of former Treasury Secretary Paulson’s actions. Wray believes that we can afford any necessary spending and bailouts, and that these actions will not burden our grandchildren.

The Accounting Campaign Against Social Security and Medicare

The Federal Accounting Standards Advisory Board (FASAB) has proposed subjecting the entire federal budget to “intergenerational accounting”—which purports to calculate the debt burden our generation will leave for future generations—and is soliciting comments on the recommendations of its two “exposure drafts.” The authors of this brief find that intergenerational accounting is a deeply flawed and unsound concept that should play no role in federal government budgeting, and that arguments based on this concept do not support a case for cutting Social Security or Medicare.

The FASAB exposure drafts have not made a persuasive argument about basic matters of accounting, say the authors. Federal budget accounting should not follow the same procedures adopted by households or business firms because the government operates in the public interest, with the power to tax and issue money. There is no evidence, nor any economic theory, behind the proposition that government spending needs to match receipts. Social Security and Medicare spending need not be politically constrained by tax receipts—there cannot be any “underfunding.” What matters is the overall fiscal stance of the government, not the stance attributed to one part of the budget.

The Outlook for Macroeconomics and Macroeconomic Policy

“Change” was the buzzword of the Obama campaign, in response to a political agenda precipitated by financial turmoil and a global economic crisis. According to Research Associate Thomas Palley, the neoliberal economic policy paradigm underlying that agenda must itself change if there is to be a successful policy response to the crisis. Mainstream economic theory remains unreformed, says Palley, and he warns of a return to failed policies if a deep crisis is averted. Since Post Keynesians accurately predicted that the US economy would implode from within, there is an opportunity for Post Keynesian economics to replace neoliberalism with a more successful approach.

Palley notes that there is significant disagreement among economic paradigms about how to ensure full employment and shared prosperity. A salient feature of the neoliberal economy is the disconnect between wages and productivity growth. Workers are boxed in on all sides by globalization, labor market flexibility, inflation concerns, and a belief in “small government” that has eroded economic rights and government services. Financialization, the economic foundation of neoliberalism, serves the interests of financial markets and top management. Thus, reversing the neoliberal paradigm will require a policy agenda that addresses financialization and ensures that financial markets and firms are more closely aligned with the greater public interest.

Money Manager Capitalism and the Financialization of Commodities

In a new public policy brief, Senior Scholar L. Randall Wray shows how money manager capitalism—characterized by highly leveraged funds seeking maximum returns in an environment that systematically underprices risk—has destabilized one asset class after another, with commodities being simply the latest. Policymakers must fundamentally change the structure of our economic system and reduce the influence of managed money, Wray argues, in order to break the speculative boom-and-bust cycle.

Policy Lessons from America’s Historic Housing Crash

Treasury Secretary Henry Paulson’s latest plan for tackling the housing-centered credit crisis involves giving the Federal Reserve vast new authority to regulate investment banks, not just depository institutions. However, news analyst Pedro Nicolaci da Costa argues that attitude changes among regulators will be even more important than shifts in mandate in ensuring that regulators like the Fed do their jobs properly.

According to Senior Scholar L. Randall Wray, the current crisis in financial markets can be traced back to securitization (the “originate and distribute” model), leverage, the demise of relationship-based banking, and a dizzying array of extremely complex instruments that—quite literally—only a handful understand.

In this brief, Senior Scholar Jan Kregel reviews Hyman P. Minsky’s concept of financial fragility—in short, that the structure of a capitalist economy becomes more fragile over a period of prosperity—and concludes that the current crisis is in fact the result of insufficient margins of safety based on how creditworthiness is assessed in the new “originate and distribute” financial system.

A Minsky Moment

It is now clear that most economists underestimated the widening economic impact of the credit crunch that has shaken American financial markets since at least mid-July. A credit crunch is an economic condition in which loans and investment capital are difficult to obtain; in such a period, banks and other lenders become wary of issuing loans, so the price of borrowing rises, often to the point where deals simply do not get done. Financial economist Hyman P. Minsky (1919–1996) was the foremost expert on such crunches, and his ideas remain relevant to understanding the current situation.

Suggestions for a New Agenda

The failure of the Doha Development Round of World Trade Organization (WTO) negotiations in July 2006 was the first major collapse of a multilateral trade round since World War II. Research Associate Thomas Palley sees the failure as an event that could mark the close of a 60-year era of trade policy largely centered on increasing market access and reducing tariffs, quotas, and subsidies. Doha’s demise represents an opportunity to challenge the intellectual dominance of the current WTO paradigm, to expose the failings of the neoliberal model of economic development, and to reposition the global trade debate.

What Will the Housing Debacle Mean for the U.S. Economy?

With economic growth having cooled to less than 1 percent in the first quarter of 2007, the economy can ill afford a slump in consumption by the American household. But it now appears that the household sector could finally give in to the pressures of rising gasoline prices, a weakening home market, and a large debt burden.

How Should Policy Respond?

According to Research Associate Thomas I. Palley, global outsourcing represents a new economic challenge that calls for a new set of institutions. Palley expands upon the problems of offshore outsourcing as outlined in Public Policy Brief No. 86 and focuses on the microeconomic foundations. He argues that outsourcing is a central element of globalization that is best understood as a new form of competition. Palley urges policymakers to understand the economic basis of outsourcing in order to develop effective policies, and suggests that they focus on enhancing national competitiveness and establishing new rules that govern the nature of global competition.

A Rendezvous with Reality

Over the past decade, deficit spending by consumers has supported the United States economy. Research Associate Robert Parenteau analyzes the financial balance of American households and finds that the pace of deficit spending is likely to stall and, possibly, reverse course. This reversion will jeopardize US profit and economic growth, as well as the growth of countries dependent on export-led development strategies. His research supports the position of other Levy Institute scholars who have urged policymakers to recognize the consequences of current imbalances in the US economy.

Toward Convergence and Full Employment

Unemployment in the European Union (EU) is a serious problem that threatens to disrupt the integration of accession countries, the character of individual countries, and the continued existence of the EU. European integration poses a huge conundrum for European employment because the conventional theory explaining unemployment in Europe—labor market rigidities—is wrong. According to Senior Scholar James K. Galbraith, the application of this policy will not cure European unemployment, but it could destroy the economic promise of the EU for its poorer regions and the accession countries.

Toward Convergence and Full Employment

The theory of comparative advantage says that there are gains from trade for the global economy as a whole. In this second brief of a three-part study of the international economy, Research Associate Thomas Palley observes that comparative advantage is driven by technology, which can be influenced by human action and policy. These associations have huge implications for the distribution of gains from trade and raise concerns about the future impact of international trade on the US economy. Palley calls for strategically designed US trade policy that can influence the nature of the global equilibrium and change the distribution of gains from trade. Recent works by Ralph Gomory and William Baumol and Paul Samuelson use pure trade theory to question the distribution of trade gains across countries over time and to challenge commonly held beliefs. These microeconomic and trade theorists identify a new issue: the dynamic evolution of comparative advantage and its impact on the distribution of gains from trade, which depends on changing global demand and supply conditions. (See also, Public Policy Brief No. 85.)

Why Today’s International Financial System Is Unsustainable

The stability of the international financial system is in doubt. Analysis of the system has focused mainly on the sustainability of financing the American trade deficit and has failed to understand the microeconomics of transactions within the system. According to this brief by Thomas I. Palley, the international financial system is unsustainable for reasons of demand, not supply. He recommends a global system of managed exchange rates to replace the current system before it crashes, along with the US economy.
East Asian economies are pursuing export-led growth and running huge trade surpluses with the United States by actively pursuing policies aimed at maintaining undervalued exchange rates. Their governments continue to accumulate US financial assets in order to support and stabilize the international financial system.While East Asian policymakers are correct in their belief that they can improve economic outcomes through exchange rate intervention, the system is undermining the structure of income and aggregate demand and eroding US manufacturing capacity.

A Pessimistic View

Even as the United States enjoys an economic expansion, there is an undercurrent of concern among economic analysts who follow financial markets. Some feel that the expansion of the credit derivatives markets poses the threat of a crisis similar to the Long-Term Capital Management debacle of 1998. Credit derivatives allow banks to share risks with holders of the derivatives, which are often mutual funds and other nonbank financial institutions.The Basel II Accord, now being implemented in many countries, is hailed as a good form of protection against the risk of a series of bank failures of the type that might cause problems in the derivatives markets. Basel II represents a more sophisticated and complex version of the original Basel Accord of 1992, which set minimum capital ratios for various types of bank assets.

The Case to Replace FDIC Protection with Self-Insurance

The Federal Deposit Insurance Corporation (FDIC) currently insures bank deposit balances up to $100,000. According to some observers, statutory protection creates moral hazard problems for insurers because it allows banks to engage in risky activities. As an example, moral hazard was a key contributor to huge losses suffered when thrift institutions failed during the 1980s.
Author Panos Konstas outlines a plan to reduce the risk of government losses by replacing insured deposits with uninsured deposits and eliminating some of the costs of deposit insurance. His plan proposes a self-insured (SI) depositor system that places an intermediary between the lender (saver) and borrower (bank) in the credit-flow chain. The FDIC would guarantee saver loans and allow the intermediary to borrow at the risk-free interest rate if the intermediary’s bank deposit is statutorily defined outside the realm of FDIC insurance. The risk is therefore transferred to depositors (intermediaries); thus creating incentives for depositors to earn a rate of return at least equal to the cost of borrowing plus a risk premium based on the risk profile of banks.

Social Security Is Only the Beginning . . .

As his new term begins, President George W. Bush has been trying to focus his domestic agenda on what he calls the "ownership society," a sweeping vision of an America in which more citizens would hold significant assets and be free to make their own choices about providing for their health care and retirement, and educating their children.
L. Randall Wray, who has written for the Levy Institute on many topics, evaluates the premises and logic of this program. Wray points out that much of the history of the Western world since the advent of liberalism has been marked by a gradual rise in the power of those who lack property. Some of the milestones in this progression include universal suffrage, regulation of business, and progressive taxation. Bush's ownership society proposals, according to Wray, would result in a partial reversal of the progress of the last 250 years. The reason is that, while Bush's plans would undoubtedly increase the choices and power of those who have property, they would fail to democratize ownership. Many gains to the wealthy would come at the expense of the poor, the sick, and the elderly.

The Case Against the Fiscal Hawks

For some time, Levy Institute scholars have been engaged with issues related to the current account, government, and private sector balances. We have argued that the existing imbalances in these accounts are unsustainable and will ultimately present a serious challenge to the performance of the American economy.

Other scholars are also concerned, but for reasons that we do not share. They argue that the interest rate is determined by the supply and demand of saving. When the government reduces its saving, the total supply of saving falls, and the interest rate inevitably rises. The result, they say, is that interest-sensitive spending, and investment in particular, falls. Finally, these scholars say, less investment now necessarily implies less output in the future.

In this new brief, Senior Scholar James K. Galbraith evaluates a recent article by William G. Gale and Peter R. Orszag, two economists who regard this view of deficits as plausible. He forwards an alternative, Keynesian view. This alternative suggests that deficits can increase overall output, possibly enabling the government to spend more money without increasing the ratio of the debt to GDP. He casts doubt on the notion that the interest rate is determined by the supply and demand of saving, arguing that monetary policy plays a much larger role than Gale and Orszag allow for. Moreover, he writes, strong demand for goods and services is more important than the supply of capital in determining the pace of technological advance and the rate of growth of output per worker.

The Case for Rate Hikes, Part Two

The most charitable interpretation of the Federal Reserve’s recent interest rate hikes is that they appear to have been premature. A convincing array of data on payrolls, employment-to-population ratios, and other labor market indicators show that the current recovery has not yet attained the degree of labor market tightness that was common in previous recoveries, and therefore that the threat of inflation is minimal. Hence, the Fed, in raising rates, was unnecessarily jeopardizing the economy’s weak recovery.

In this new brief, we learn about the flaws in the Fed’s thinking that have led to its frequent policy mistakes. Author L. Randall Wray traces several strands of current central bank thinking back to their roots in the Fed’s internal discussions in the mid-1990s. Transcripts of these discussions have recently been released, a development that has yielded some disturbing and telling insights about the way in which monetary policy is formed.

Did the Fed Prematurely Raise Rates?

For a time, the Federal Open Market Committee (FOMC) seemed to have learned from the mistakes of the past. Instead of taking good economic performance as a sign of incipient inflation, Chairman Alan Greenspan kept interest rates relatively low in the late 1990s, even as unemployment plummeted. Many commentators worried that the FOMC's unusually easy stance would usher in a period of runaway inflation, but inflation stayed in the 2 to 3 percent range.

Now, with scant evidence of an inflationary threat, Greenspan and his committee seem intent on raising interest rates. Greenspan argues that the current anemic expansion is "self-sustaining" and no longer needs the support of low interest rates.

Senior Scholar L. Randall Wray evaluates the Fed's concern about a coming inflation and its decision to begin raising interest rates. He begins with an examination of key market developments that might signal inflation. Most economists worry about inflation when labor markets begin to tighten and employees gain the bargaining power necessary to demand pay raises. Wray marshals an array of evidence demonstrating that workers can only wish for such conditions. The economy has created no net new jobs since the beginning of the current presidential term. To match the 64.4 percent proportion of adults who held jobs during the Clinton era, the economy would have to generate four million new positions. It is clear that the job market will not be a source of inflation any more than it was during the Clinton boom.

A Minskyan Assessment

Twenty to 25 years ago, a debate was under way in academe and in the popular press over the War on Poverty. One group of scholars argued that the war, initiated by Presidents Kennedy and Johnson, had been lost, owing to the inherent ineffectiveness of government welfare programs. Charles Murray and other scholars argued that welfare programs only encouraged shiftlessness and burdened federal and state budgets.

In recent years, despite the fact that the extent of poverty has not significantly diminished since the early 1970s, the debate over poverty has seemingly ended. In a country in which middle-class citizens struggle to afford health insurance and other necessities, the problems of the worst-off Americans seem to many remote and less than pressing. Moreover, the welfare reform bill of 1996 has deflected much of the criticism of the welfare state by ending the individual-level entitlement to Aid to Families with Dependent Children benefits (now known as Temporary Assistance to Needy Families) and putting time limits on welfare recipiency, among other measures.

The Risks to Consumption and Investment

A rebound of consumption, investment, and consumer confidence in the second half of 2003 has raised hopes that the United States' recovery from the 2001 recession is on a sustainable course. According to this brief by Philip Arestis and Elias Karakitsos, however, the trend in the short-term factors affecting the economy has changed for the better, but long-term factors remain at risk. Slow, rather than rapid, economic growth is better in 2004, the authors say, as rapid growth would result in higher long-term interest rates, which would threaten the property market boom and weaken investment in 2005 and beyond. The authors are sure, however, that the current administration will find it difficult to refrain from additional procyclical fiscal stimulus in light of the upcoming presidential election. The result could lead to a rapidly declining US economic growth rate following the election in November.

Its Persistence in an Expansionary Economy

Economic growth and a rising stock market in the 1990s gave the impression that everyone was accumulating wealth and asset poverty rates were declining. The impression was supported by the official, income-based poverty measure, which exhibited a sharp decline. According to Senior Scholar Edward N. Wolff and Research Scholar Asena Caner, poverty measures should include wealth as well as income. Their study of asset poverty in the United States between 1984 and 1999 focuses on the lower end of the wealth distribution and shows that asset poverty rates did not decline during the period studied, and that the severity of poverty increased. It also shows that asset poverty is much more persistent than income poverty.

New Institutions for an Inclusive Capital Market

In 2002 more than $1 trillion worth of new bonds was sold across international boundaries. The total stock of cross-border bond holdings was more than $9 trillion. Such lending, together with sales of equities, is regarded as one of the chief benefits of globalization. But financial investment does not always flow where it is needed most. While it appears that the world cannot be satiated with US securities, issues of emerging economies account for less than 6 percent of total international holdings of debt securities (D’Arista 2003). And, as Argentina discovered recently, international lenders can be fickle, selling enough foreign currency and securities to cause a currency crisis.

Treating the Disease, Not the Symptoms

Most recent discussions of deflation seem to overlook the main dangers posed by a deflationary economy and appear to offer superficial solutions. In this brief, the authors argue that, barring drastic changes in asset and output prices, deflation itself is not the main problem, but rather the recessionary conditions that sometimes give rise to deflation. Whether or not prices are falling, the proper remedy for a recession is the Keynesian one: government deficit spending, used to finance useful programs and tax cuts. These measures will reduce unemployment, increase growth, and relieve deflationary pressures.

How Far Can Equity Prices Fall?

In an asset and debt deflation, the process of reducing debt by saving and curtailing spending takes a long time, say authors Philip Arestis and Elias Karakitsos. Current imbalances and poor prospects for spending in the private sector affect the balance sheets of the commercial banks. The downward spiral between the banks and the private sector induces a credit crunch that adversely affects the US economy, which is vulnerable to exogenous shocks and lacks the foundations for a new, long-lasting business cycle.

Soft Budgets and the Keynesian Devolution

The "American Model" serves as a point of reference in discussions of economic policy around the world, especially in Europe. Many claim that the American version of the free market represents an ideal type—it is the highest form of capitalism. Senior Scholar James K. Galbraith argues, however, that the United States has relied heavily on government intervention in housing, health care, pensions, and education. Not only have these programs been largely successful and popular, but they also provide a Keynesian stimulus to spending that helps account for the strength of the US economy. Now that the United States is in a weak, jobless recovery, the key to restoring growth may lie in the kinds of governmental programs that have helped to sustain and stabilize the US economy in the past.

The Dubious Effectiveness of Interest Rate Policy

Central bankers and many economists have abandoned "activist" policies and monetarism and adopted in their place a new view of the role of monetary policy. This view draws on many of the tenets of more traditional theories of money—monetarism's emphasis on inflation control and skepticism about the use of easy-money policies to permanently increase output, and the Keynesian view that the total stock of money is not an important driving force behind either inflation or unemployment—yet it also takes a dim view of democratic input to the policymaking process. This brief evaluates a premise subscribed to by most central bankers: that monetary policy can be effectively used to control inflation without any permanent sacrifice in the form of reduced income or job opportunities.

Medical Practice Norms and the Quality of Care

This brief considers the interaction between physician incentive systems and product market competition in the delivery of medical services via managed care organizations. At the center of the analysis is the process by which health maintenance organizations (HMOs) assemble physician networks and the role these networks play in the competition for customers. The authors find that although physician practice styles respond to financial incentives, there is little evidence that HMO cost-containment incentives cause a discernable reduction in care quality. They propose a model of the managed care marketplace that solves for both physician incentive contracts and HMO product market strategies in an environment of extreme information asymmetry: physicians perceive the quality of care they offer perfectly and their patients do not perceive it at all.

An Evaluation of a Plan to Reduce Financial Instability

In this brief, Biagio Bossone of the International Monetary Fund evaluates narrow banking from the perspective of modern theories of financial intermediation. These theories portray the status quo banking system as a solution to otherwise intractable problems of imperfect information, risk, and even moral hazard. The system's characteristic coupling of liquid liabilities with illiquid assets—seen by some as an undesirable "mismatch"—in fact contributes greatly to the efficiency of the economy. Bossone argues that these efficiency gains outweigh the disadvantages associated with the existing legal framework.

Balancing Government Regulation and Market Force

At issue in the debate over the renewal of the Community Reinvestment Act (CRA) of 1977 are the various yardsticks regulators use to judge whether individual institutions are meeting the credit and service needs of low- and moderate-income (LMI) communities. Based on careful examination of new CRA data and assessments of comments by selected stakeholders, the author concludes that if the new rules are to succeed, regulators will have to strike a careful balance between various competing interests vying to tip the balance of power in their favor. For example, to offset the effects of a possibly too-close relationship between industry and government agencies, the rules could mandate very explicit and objective measures of institutions' lending performance. To relieve the burden of compliance, the rules could be simplified and pared down to their essentials. And to prevent banks from taking advantage of vulnerable members of LMI communities, rule makers could adopt strong measures against "predatory lending."

The Impact of Misguided Macroeconomic Policies

Although the costs associated with moving an antiquated socialist economy toward its capitalist counterpart was anticipated to be significant, German industrial efficiency was expected to quickly overcome any challenges. Things turned out rather differently. Conventional wisdom blamed poor economic performance on unification. The government and the Bundesbank therefore put in place fiscal and monetary policies aimed at reducing borrowing and, in turn, containing the threat of inflation. The positive results (albeit in five years) supported this perception. The author of this brief, however, takes exception to the notion that these policies were effective in stabilizing the economy. His analysis shows that the country’s poor economic performance dramatically dampened economic activity and led to an extended period of sluggish growth. Blame for anemic growth and high unemployment, he believes, should be placed squarely on the country’s finance department and central bank rather than on unification.

Is the Gap Closing?

Despite decades of policies aimed at improving the economic position of African Americans in terms of relative income and earnings, they remain substantially behind whites. The research presented in this brief indicates that the wealth gap is even more staggering. Following families over time in order to understand racial differences in the sources and patterns of wealth accumulation, Senior Scholar Edward N. Wolff finds that African Americans would have gained significant ground relative to whites in the past 30 years if they had inherited similar amounts, comparable levels of family income, and more similar portfolio compositions. Therefore, even if the income gap between whites and African Americans were immediately eliminated, it may take another two generations for the wealth gap to close. However, certain policies could help speed up the process.

The Markets vs. the ECB

This brief assesses the experiences of Europe’s policy regime in the two years since the introduction of the euro in 1999, particularly the performance of the European Central Bank (ECB), the institution in charge of conducting monetary policy for the euro area. Conventional accounts of European growth, price, and labor market performance over recent years focus on labor market institutions and wage trends. By contrast, the interpretation offered here assigns a key role to demand-side factors as the driving force behind the recovery in output and employment growth. It is argued that the euro's plunge essentially resumed the trend of deutsche mark weakness that had started in 1996 and that currency depreciation amounted to a significant easing of monetary conditions.

A Study of the Effects of Campaign Finance Reform

Proposals for campaign finance reform are essentially based on the belief that political influence can be bought with financial donations to a candidate’s campaign. But do contributions really influence the decisions of legislators once they are in office? In this brief, Christopher Magee examines the link between campaign donations and legislators’ actions. His results suggest that political action committees donate campaign funds to challengers in order to affect the outcome of the election by increasing the challenger’s chances of winning. These contributions have a large effect on the election outcome but do not seem to affect challengers’ policy stances. In contrast, campaign contributions to incumbents do not raise their chances of being reelected and seem to be given with the hope of gaining influence.

Is There an Alternative to the Stability and Growth Pact?

This brief provides a detailed description of the Stability and Growth Pact, an agreement entered into by the member states of the European Union that has far-reaching implications for the long-run value of the euro, and therefore, on the real economy in terms of output growth and employment. Yet despite the fact that the pact underpins the adoption of the single currency and has fundamentally redefined the scope and nature of economic policymaking in the member states, public discussion about it is relatively scant, especially on our side of the Atlantic, even though the economic health of the European Union does matter to the economic and strategic position of the United States. The authors provide propose a critique of the pact that focuses on the shortcomings induced by the its regime of mandatory fiscal austerity, the separation between fiscal and monetary policy, the undemocratic structure and lack of accountability of the European Central Bank, and the paramount importance attached to price stability at the expense of other policy objectives. According to the authors, these shortcomings will have serious negative effects on the current and future economic performance of the member states and the material well-being of its citizens.

Trends in Job Skill Requirements, Technology, and Wage Inequality in the United States

Despite seven years of economic growth a large gap exists in the wages earned by workers at the top of the earnings scale and those at the bottom. The leading explanation for this growth in wage inequality continues to be the skills-mismatch theory. This theory in part posits that gains in technology have resulted in jobs having highly technical skill requirements that have outpaced growth in worker skills; demand for highly skilled workers therefore rises more swiftly than that for less-skilled workers, creating upward pressure on wages for those with the most skills. The empirical evidence is examined here and shows that there is little evidence to support the mismatch theory as there has been little sign of a shortage of workers with computer or general technical skills. If the analysis is correct, then policies currently used to close the wage gap, such as improved education and training, will not alone solve the inequality problem. Rather, the solution may require macroeconomic policies aimed at maintaining economic growth and full employment, and labor policies, such as the minimum wage, that support the earnings of workers at the lower end of the wage scale.

The Macroeconomics of Social Policy

The idea that saving is the force driving private investment and economic growth has become ever more entrenched in mainstream economic thought as well as in the minds of policymakers and the general public. Even though the empirical evidence that increased household saving will directly stimulate private investment and economic growth is scant, the idea remains prominent and underlies policy debates on topics ranging from Social Security to a balanced federal budget to reducing the national debt. The popular theory underlying these cuts is countered by evidence that private sector investment is financed primarily out of business retained earnings, not household saving, which explains why current policies aimed at raising household saving via cuts to social spending programs have been unsuccessful at raising saving rates. Moreover, government spending on social programs does not necessarily reduce economic growth. Higher government spending could be supported, and a greater degree of investment spending stimulated, through a combination of lower taxes on business income and higher taxes on personal incomes of upper-income households.

The Pursuit of Price Stability and Full Employment

The Federal Reserve currently has two legislated goals—price stability and full employment—but a debate continues about making price stability the Fed’s primary and overriding goal. Evidence from the recent history of monetary policy contradicts arguments in favor of assigning primacy to inflation fighting and supports giving full employment equal importance. Economic performance under the dual mandate has been excellent, with low unemployment and low inflation, while many European countries whose central banks focus solely on inflation are experiencing double-digit unemployment. The costs of unemployment are high, but the costs of even moderate inflation are estimated to be low. Central bankers, who tend to be inflationaverse, need to be prodded to consider goals other than inflation. And, if the Fed pursues price stability exclusively, the price level is not free to increase in the event of an adverse supply shock to prevent large increases in unemployment. A dual mandate allows the Fed to focus on one goal or the other as conditions demand and to balance policy effects.

Replacing a Welfare Model with an Insurance Model

The nation is not prepared to deal with the jump in expenditures for long-term care that will come with the aging of the baby-boom generation. Only a small part of that care is paid for privately (out-of-pocket or through private insurance). Most is financed through Medicaid, the program that is intended to ensure medical care for the indigent. This use of Medicaid comes at a high cost for individuals and society: the allotment of more than a third of the Medicaid budget to long-term care; a two-tier care system; and the commandeering of limited funds by middle- and high-income people through elaborate estate planning to circumvent eligibility requirements. These problems would be mitigated by replacing the welfare model with an insurance model—voluntary or compulsory private insurance, with subsidies through income-scaled tax credits to ensure affordability. An equitable and efficient system could be created with a blend of public money, private insurance, and other private saving, with a safety net for those in greatest need.

Infrastructure Financing with the AGIS Bond

The current system of tax-exempt bond financing is inefficient and inequitable because a large portion of the federal subsidy provided by the tax exemption does not reach state and local governments and accrues instead to the wealthiest investors. In addition, the current system excludes large institutional investors, both domestic and foreign, with their huge pools of capital, and it lacks the stable oversight characteristic of the taxable bond market. Edward V. Regan and his associates have developed a new security concept to overcome these weaknesses. The American global infrastructure security (AGIS) bond has two components that are sold separately—tax exemption and income flow—creating a taxable bond for sale in the regular capital markets in addition to the tax exclusion benefit.

Right-to-Work Laws, Unionization, and the Minimum Wage

Union strength is capable of boosting wages for workers at the low end of the income scale. Even when differences in education and industry type are accounted for, workers in right-to-work states have a greater probability of earning close to the minimum wage than workers in states with relatively high union density. The decline of unionization requires that other labor market institutions, mainly the minimum wage, be used to improve the distribution of income in order to combat the continuing growth of inequality in the United States.

Realities and Fallacies in International Financial Reform

The causes for the instability that has marked the financial system over the past decade lie deep in the economic theory that urges easy and efficient substitution of one piece of paper for another, in the technology-driven tight articulation of receipts and payments, and in the growth of leverage that diminishes the creditworthiness of major institutions when an interruption in their receipts requires them to seek funds. Many of the proposals aimed at reducing risk in the financial system, however, do not recognize these changes or their importance. The call for greater bank transparency, for example, fails to take into account both that bankers and regulators are jealous of their "privacy" and that financial markets, not banks, have lately become the more important player in the financial system. Guidelines are needed that reflect the new financial architecture: controls on the creation of leverage in the repo and derivatives markets and limits on banks' freedom to back away from borrowers' cross-border liabilities in currencies other than their own. When such preventive measures fail, then crisis management will require "standstill" agreements to encourage the continuation of something like normal economic life while the losses from financial failure are sorted out.

Providing for Retirees throughout the Twenty-first Century

Projections of an impending crisis in financing Social Security depend on unduly pessimistic assumptions about basic demographic and economic variables. Moreover, even if the assumptions are accepted, the projected gap between Social Security revenues and expenditures would not constitute a "crisis" and could be eliminated with relatively simple adjustments when it occurs. The real issue regarding our ability to provide for retirees throughout the coming century is not the size of Social Security Trust Funds, but the size and distribution of the whole economic pie. When the issue is viewed in this light, it becomes clear that most proposals to "save" the system—locking away budget surpluses, investing the Trust Funds in the stock market, privatization, reduction of benefits—do not address the real problem of caring for future retirees. Solutions consistent with the true nature and scope of the problem lie not within the Social Security system itself but in the realm of a general fiscal policy aimed at ensuring the growth of the economy.

An Inside Look at the Out of the Labor Force Population

Despite a long period of strong economic growth, more than 28 million working-age persons were categorized by the Bureau of Labor Statistics as out of the labor force in 1998. A small portion of this population will move into the labor force, but the majority will remain without work. This brief examines the demographics of the out-of-the-labor-force population, their reasons for not working, the likelihood that they will move into the labor force, and the adverse effects on them of prolonged joblessness. Current labor market policies, and especially welfare reform measures, have proved ineffective for the "hard-core" jobless because the policies are predicated on the mistaken notion that the private labor market is dynamic and flexible enough to accommodate anyone who wants to work. A public employment program would complement the operation of the private market, providing those who are able and willing with income, a sense of worth, the opportunity to make a social and economic contribution, and preparation for entry into the labor force.

Full Employment Policy: Theory and Practice

Claims that the nation has reached full employment take for granted the need for a reserve pool of labor to maintain price stability and labor market flexibility. But are millions of jobless and underemployed workers the best we can do in these times of economic expansion? And what will happen when the inevitable downturn comes? Reduction of the workweek and employment subsidies have been proposed to achieve higher employment, but neither is sure to raise employment and both may have serious side effects. A public service employment program that offers jobs at a fixed wage to all who are willing and able to work can provide full employment without inflationary pressures and with labor market flexibility, preserve workers’ skills, contribute valuable public services, and be relatively inexpensive.

Fiscal Policy and Growth Cycles

Based on neoclassical theory, cutting budget deficits has come to be seen as a principal way to increase long-run growth, but the empirical evidence is ambiguous on the outcome of this macropolicy. A new model, the classical growth cycles (CGC) model, offers an alternative theoretical framework for analyzing the complex effects of fiscal policy. The CGC model holds that the impacts of fiscal policy on growth are transmitted through its effects on business profitability and the business saving rate. Investigation of both short-run and long-run effects of government spending and of the distinctive long-run effects of different types of government spending suggests that indiscriminate deficit cutting will not lead to a rise in the long-run profit rate and may exacerbate poverty and inequality in the short and the long run.

Levy Institute Survey of Hiring and Employment Practices

The Levy Institute conducted a survey of small businesses to elicit information about their hiring and employment practices, especially the hiring of former welfare recipients; preferences regarding education, training, and other characteristics of potential employees; effects of increases in the minimum wage on employment decisions; and their responses to various forms of government wage and training subsidies. Analysis of the survey results indicates weaknesses in the assumptions on which recent welfare reform has been based. It also suggests a role for small business that has been overlooked. An active partnership between government and small business, involving incentives for hiring and training as well as mandates for welfare reduction, is required if former welfare recipients are to become independent and productive members of the labor force.

The Job Opportunity Approach to Full Employment

Central banks, national governments, and international organizations have resisted policies that would promote full employment because high employment and high capacity utilization are associated with structural rigidities that result in sluggish growth, inflationary pressures, and other undesirable consequences. What has been almost entirely overlooked is the way in which public sector activity can enhance flexibility with regard to labor, capital goods, natural resources and environmental protection, methods of production, and location of economic activity. The job opportunity approach makes strategic use of public sector activity to create truly full employment, thereby reducing the social and economic costs of unemployment, and to promote projects designed to be consistent with broad macroeconomic goals and social values.

Productive and Financial Challenges

The postwar system of corporate governance in Germany is being threatened by the failure of some industries to maintain their competitive position (with resulting significant job losses) and pressures for financial liquidity driven by those who have accumulated substantial financial holdings, institutions competing for control of those holdings, and those concerned about the funding of the pension system. The strength of the competitors (mainly the Japanese) lies not in cost differences, but in their capabilities, based on financial commitment and organizational integration, to innovate and thereby to build the long-run future of the corporation. If German labor, finance, and corporate managers each insist on pursuing independent strategies to extract returns from industrial enterprises and if corporations replace investment in innovation with shareholder value as the basis for corporate decision making, German industry may be unable to regenerate the basis of sustainable prosperity.

Adapting to Financial Pressures for Change

Despite the crisis in the Japanese financial sector, prolonged recession, and competitive challenges, Japan’s formidable productive system remains strong. Nevertheless, the system of corporate governance, which has pursued a strategy of retaining corporate revenues and reallocating labor resources and returns to labor in order to invest in productive capabilities, faces short-term pressures from a transformation of the financial sector and long-term pressures from the growth of intergenerational dependence. Current reforms seek to generate funding for the pension system and profits for financial enterprises from international securities and money markets. These reforms seem to work within the corporate governance framework that emphasizes the retain-and-reallocate strategy, but the question is whether they will create powerful pressures to extract returns from the domestic economy, thereby affecting how corporations are managed and resources allocated.

An Ethical Framework for Cost-Effective Medicine

HMO medicine sets up an inevitable conflict between the physicians’ traditional fiduciary role and the financial interests of the health plan and its physicians. Regulatory interventions, such as the formulation of rules regarding clinical practice, put government in a micromanagement role it cannot hope to perform well. Government instead should focus on building a regulatory framework to protect patients that would deal with the ethical problems that flow from the very design of HMO medicine. It should address fundamental issues, principally, the financial incentives under which HMO physicians work, restrictions on communication with patients about care options not covered by their health plan, accountability for decisions to withhold care, and the return of care decisions to the province of the physician. The challenge for regulators is to retain the power of the economic incentive to encourage cost-conscious practice, but to separate it from the welfare of patients.

Net Earnings Capacity versus Income for Measuring Poverty

The United States' official poverty measure defines the poor in terms of a family’s actual, yearly cash income relative to an estimate of the income needed to sustain a minimally acceptable standard of living. An alternative definition, designed to reflect a family’s ability to achieve economic independence, would instead rest on its capacity for generating income. Net earnings capacity (NEC) is an indicator of the income a family could earn if all working-age family members work full-time, full-year, at earnings consistent with their age, education, and other characteristics, with an adjustment made for child care costs. NEC is not intended as a replacement for the official measure, but as a supplement. The official measure identifies the population in need of short-term monetary assistance, whereas NEC identifies the population in need of longer-term skill-enhancing assistance in order to become self-reliant. Two general policy approaches to reduce the prevalence of NEC poverty are to increase the level of education and other income-generating characteristics of those with low earnings capacity and to increase the returns they receive for work.

Job Opportunity for the Less Skilled

During the recent robust expansion only 700,000 of the almost 12 million jobs created went to the half of the population that does not have at least some college education. Even though the number of officially unemployed fell to less than 4 million in the 25-and-over age group, there remain in that group over 26 million potentially employable workers—the combined number of those who are actively seeking work (and are counted as officially unemployed) and those who are currently out of the labor force but would be willing to participate. Since expansion has not proven sufficient to remedy this intolerably high level of wasted human resources, well-targeted, active labor market policies are required. One such policy is a job opportunity program that "hires off the bottom," providing minimum-wage jobs for all those who are ready, willing, and able to work. The program would create a buffer stock of labor from which employers could hire during upturns instead of bidding up the wages of the already employed, and thus would offer both full employment and price stability.

Regulation of Cross-border Interbank Lending and Derivatives Trade

Asia presents a cumulation of apparently rational decisions that produced disastrous results—a textbook illustration of "financial instability" developing from the economics of euphoria. A combination of factors produced the crisis as enormous capital inflows were drawn to the "Asian miracle"-pegged exchange rates with fluctuating interest rates, integrated economies, moral hazard created by central banks, and short-term lending and derivatives trade without sufficient evaluation of risk and credit analysis of borrowers. The Asian tragedy demonstrates the need for improved regulation of cross-border interbank lending, improved accounting for both borrowers and lenders, and separation of the close links between governments and their banking sector.

The Relationship between Public Capital and Economic Growth

Investment in infrastructure is necessary for a strong, flexible, and growing economy. However, the relationship between public capital and economic growth is not linear. At a certain level, the tax burden associated with financing and maintaining public capital reduces the returns to private industry, which in turn reduces growth; also, different types of spending have different effects on growth. The short- and long-term growth-maximizing effects of public investment increase as the ratio of public to private capital stock rises to an optimal level (found to be about 61 percent); above that level, the growth effects decrease. The public-to-private ratio is below the optimal level throughout much of the country and government spending is not always directed toward the types of investment that have the most positive effects on growth. Good economic policy requires both increasing the public capital stock and reorienting government spending from consumption to investment in physical capital stock.

Linking the Minimum Wage to Productivity

The fact that every change in the minimum wage requires an act of Congress means that debate over the wisdom of having a minimum is repeatedly returned to the political arena. As inflation continues to erode the value of the minimum wage, each legislative delay means that a larger increase is required. The larger the increase, the more resistance to its passage, so that by the time Congress acts, the political compromise is an increase that is too little and too late to be of much help in lifting workers out of poverty. Automatic adjustment of the wage, with increases keyed to measures of private sector productivity, would eliminate this problem. With the institution of a mechanism that provides regular and incremental increases, Congress will no longer be forced to revisit the issue, employers will not be confronted by sudden and large increases, and the value of the wage will be maintained.

How Technological Change Increases the Duration of Unemployment

Why does a dynamic growing economy have a persistent long-term unemployment problem? Research Associates Baumol and Wolff have isolated one cause. Although technological change, the engine of growth and economic progress, may not affect or may even increase the total number of jobs available, the fact that it creates a demand for new skills and makes other skills obsolete can cause an increase in the overall rate of unemployment and the length of time during which an unemployed worker is between jobs. It goes without saying that society will not choose to slow technical innovation, but the task for policy is to find ways to offset the problems caused by this rising level and duration of unemployment.

A Fiscally Responsible Plan for Public Capital Investment

Condemned bridges, dilapidated school buildings, contaminated water supplies, and other infrastructure shortcomings threaten American growth, productivity, and prosperity. The authors of this brief propose a plan for financing infrastructure projects that is designed to have minimal effect on the federal budget and to promote sound fiscal operation. Federal zero-interest mortgage loans to state and local governments for capital projects specified by Congress can cut the cost of such projects, achieve needed improvements in the nation’s infrastructure, and thereby contribute to the American economy’s future.

The Growth in Work Hours

Is the current labor market as tight as official statistics would seem to indicate? If incumbent workers increase their hours of work, it is irrelevant to the unemployment rate, but hardly irrelevant to the level of labor supply. The authors of this brief find that job insecurity and stagnating wages have made Americans willing to work those extra hours to build a financial cushion, and a 1 percent increase in hours worked per worker for a fixed labor supply is equivalent in terms of labor supply to a 1 percent increase in the number of workers. This more realistic picture of labor supply has important implications for expectations that welfare recipients can easily find jobs, for reforms in labor market statistics to provide better information, and for the direction of monetary policy.

Disinflationary Monetary Policy and the Distribution of Income

Using theoretical predictions, econometric results, and the example of the Volcker disinflation, Willem Thorbecke establishes that through disinflation’s burden on the durable goods and construction industries, small firms, and low-wage workers and its benefits to bond market investors, it effects a redistribution of wealth from the poor to the rich. Because of this distributional consequence, he argues, engineering a disinflationary recession now to wring more inflation out of the economy would be inappropriate. On the contrary, with inflation as low as it is and with upward pressure on wages that could trigger a rise in inflation also low, now is the time for the Federal Reserve to let the economy grow—to seek policies that promote distributive justice and that help those individuals most at risk for shrinking income.

Corporate Governance and Employment: Is Prosperity Sustainable in the United States?

Since the 1970s corporate America has become obsessed with shedding employees to cut costs and with distributing revenue to stockholders. However, the way for it to regain its competitive edge and thus to restore the promise of secure and remunerative employment for its workers is to reform its system of governance. It must reject organizational segmentation and extraction of short-term returns and instead emphasize organizational integration and long-term value creation through financial commitment to investment in the collective and cumulative learning that is the foundation of industrial innovation.

Unemployment, Inflation, and the Job Structure

The concept of a labor market, responding to familiar underpinnings of supply and demand, completely colors thought on the relationship between employment, wages, and inflation, according to James K. Galbraith. However, he asserts, wages are determined not by such market forces, but by what he calls the job structure—a complex set of status and pay relationships involving individual qualifications, job characteristics, and industry patterns. What is the meaning of the job structure for policy? Notions of natural rates of unemployment and inflationary barriers to full employment fade away. Supply-side measures can no longer been seen as adequate to deal with problems of unemployment and inequality. Questions of distribution of income and adjustment of the wage structure are returned to the political context. The active pursuit of full employment is returned to the list of respectable, and essential, policy goals.

Multiracials, Racial Classification, and American Intermarriage

On the United States' census form, American citizens are told they may list any ethnic ancestries with which they identify, but are instructed to "mark one only" in the question on race. Joel Perlmann asserts that it is in the public interest to allow people to declare themselves as having origins in more than one race. To do otherwise is to deny that interracial marriages exist. This denial distorts our understanding of race data whether we are discussing projections of the composition of the American population or the definition of racial and minority status involved in discrimination legislation, affirmative action, and hiring and firing practices. If racial barriers are to be broken down, racial intermarriage should be treated in the same way any other form of ethnic intermarriage is treated, while ensuring that civil rights legislation, which rests on racial classification and counts, is not hobbled by ambiguities.

The Challenge of Financing the Baby Boom’s Retirement

The falling ratio of workers to retirees in the United States has raised concerns about Social Security’s ability to continue to provide a base level of support for all retired workers and to remain in balance with all of government's other fiscal obligations. Of alternative plans that have been proposed to safeguard the system, Walter Cadette argues against radical revamping through privatization and suggests instead minor modifications in the existing tax and benefits structure.

No Easy Answers: Labor Market Problems in the United States versus Europe

Rebecca M. Blank considers how the flexibility of American labor markets and the regulation and redistribution policies of European labor markets may determine employers’ responses to worldwide economic transformations that result in increasing wage disparity in the United States and continuing high unemployment in Europe. She suggests that since the transformations will undoubtedly continue, governments should seek to develop plans to offset and reduce the adverse labor market effects.

Real Estate and Capital Gains Taxation

The recent enactment of a capital gains tax cut resulted, according to the authors, from the absence of a true appreciation or consideration of the real beneficiaries of such a cut, its probable actual effects, the distinction between productive and nonproductive sources of capital gains (two-thirds of capital gains accrue to real estate, which is a fixed, nonproductive asset), and distortions in our current income accounting system (which shield most real estate income from taxation). The across-the-board cut, which treats real estate appreciation and true capital gains as the same, is a giveaway to real estate and will steer capital and entrepreneurial resources to a search for unearned income.

The New Welfare and the Potential for Workforce Development

The author of this brief asks why welfare, workforce development, and unemployment insurance are operated as separate entities. If the goal of the new welfare law is to end dependency and foster a work ethic, then it needs to be tied more closely to existing policy aimed at developing the workforce. Instead of viewing the new welfare system as welfare policy with a new flexibility, we should see it as an opportunity to create a more comprehensive and coherent employment program to replace outmoded public assistance.

The Case for Retargeting Tax Subsidies to Health Care

With health care delivery increasingly shaped by market and budgetary discipline, the provision of health care for all seems an ever-more-distant goal.The high cost of American health care is the inevitable by-product of its method of financing. Walter M. Cadette proposes shifting the tax subsidies to health care from the tax exclusion of employment-based health insurance to an income-scaled tax credit for the individual purchase of basic health insurance. This plan holds out promise of improving the operation of the health insurance market, making the labor market more efficient, reducing overall health care costs, and providing protection for the unemployed.